DECLINE OF THE OIL AGE

The global domination of oil is approaching its end. In a few decades, oil will become an irrelevant type of fuel for mankind, including for the largest production companies, pipelines, markets, wars of interests, etc. No matter how fantastic this prediction may sound today, both market participants and governments of oil-producing countries already recognise it.

Remarkably, the main reason of oil's demise will not be its shortage, for we will have enough oil resources for another hundred years. Rather the oil will be replaced by other, more environmentally friendly types of fuel.

According to the analysis pf BP, we can expect interesting events before the "date X", which can fundamentally change the economic situation in many countries.

Two challenges for the fuel market

With further growth of the global economy, energy consumption in the world will increase. Thus, in 2040 the world will need about 30% more energy resources than in 2020. Moreover, according to studies of various analytical groups based on the human development index, 80% of the world's population still lacks the energy necessary for normal life. Given the expected increase of the global population and that countries should ensure equal conditions for their citizens and eliminate poverty, they will have no choice but to continue to increase energy consumption. This is one of the challenges that the mankind faces today.

On the other hand, the world community has to reduce carbon dioxide emissions in order to avoid environmental disaster and global warming. These two challenges cannot be eliminated simultaneously because this is unrealistic unless the global economy relies on renewable energy.

According to Vladimir Drebentsov, BP's Chief Economist for Russia and the CIS countries, who attended the BP Statistical Review of World Energy and Outlook for Energy: A perspective to 2040 held in Baku, renewable sources will account for 15% of all the energy sources by 2040. "This is not much at first glance but if one compares the growth rate of renewable energy with growth rates in any other types of fuel, it will be clear that they are unprecedented," V. Drebentsov said.

However, this is not enough to solve the emission problem. Therefore, experts suggest a more effective way, which is to replace the so-called harmful types of fuel, such as coal, with relatively clean ones, such as nuclear energy or natural gas. World analysts believe that, starting in 2030, the demand for oil will gradually decline. "This is an extremely important conclusion for making key decisions about oil production today. Many governments, companies tend to think that it is necessary to leave oil in the ground for future generations. So, studies show that it will simply not be in demand in the next several decades, there will be no one to sell it," V. Drebentsov said.

As the Minister of Oil Industry of Saudi Arabia Zaki Yamani said back in the 70s "The stone age did not end because the world ran out of stones, and the oil age will not end because we run out of oil."

Such forecasts sometimes provoke an inadequate response from large financial institutions refusing in recent years to finance oil-related projects. This is an extremely wrong step, analysts say, because the world today is completely unprepared for a complete rejection of oil. If, according to forecasts, the demand for oil will reach 80 million barrels annually by 2040, then in the absence of investment it will be impossible to provide even half of this volume.

Decline of the Oil Age

It now becomes clear that with the growth of competition in the global oil market in the coming years the alignment of interests and spheres of influence will also change considerably. The "shale oil revolution" is slowly but steadily upsetting the usual balance of power and pricing policy on the world oil market. According to a research of BP, under normal conditions in a competitive market, the world can provide itself with oil at lower prices than before.

"The influence of OPEC on this process is quite noticeable. In recent years, the cartel has quickly responded to the challenges of the shale revolution, to that surplus oil that entered the market. The OPEC policy was effective indeed. It reduced commercial oil reserves pushing the oil prices to rise. But the problem of the oil market is that this is possible only in the short term—as soon as the prices rise, US oil production begins to grow even faster. At lower prices, the most promising shale oil fields, the so-called sweet spots, are used but as soon as the prices rise, production also begins at fields that are less productive but are profitable at high prices," V. Drebentsov said.

The shale revolution has brought to global oil production yet another important innovation: an ability to enter the oil market in short terms. Whereas traditional production methods require at least five years since the signing of an investment agreement for oil to enter the market, it takes a maximum of several months for shale oil. "It is most likely that we are going to a constant volatility of oil prices in the near future," V. Drebentsov said.

Beneficial gas

With the ending oil age, what about the natural gas. Will this trend affect the global natural gas market, where Azerbaijan will be one of the key players very soon?

According to BP analysts, the situation on the natural gas market is very similar to the trends in oil production. Last year, gas consumption grew at a faster rate than the average rate in ten years, but at the same time, growth in both production and consumption declined in the United States. This is also the result of the shale gas production, which began even earlier than the production of shale oil. In 2018, the US could increase gas production by 86 billion cubic meters. For comparison, neither Russia, nor even the former USSR have been able to achieve such an increase in their entire history.

What is even more important for global gas markets is that, in parallel with the shale gas production we can see rapid development of a liquefied natural gas (LNG) production. "These processes were not related to each other. They started separately but now we see obvious results of their coincidence in time. We can observe the growth of LNG production mostly in the US. We expect that the US will be the largest supplier of LNG in the future," V. Drebentsov said. According to Drebentsov, this is a fundamentally new phenomenon for gas markets because there has not been a global market for this type of fuel before, only regional markets in the North America, Europe, Eurasia and Asia-Pacific. Pricing in these markets seemed to live their own life, since the markets were not connected to each other. But LNG now acts as the very driving force that integrates all these markets, since a tanker with LNG can transport the gas to almost anywhere in the world. Natural gas from the east coast of the US may be easily delivered to Japan or Korea.

Thus, we observe an interesting trend when gas pricing in Asia is directly dependent on gas prices in North America. In other words, gas prices in the US become an anchor of world oil prices, which any supplier of gas, including Azerbaijan, will have to reckon with as competition between suppliers of liquefied and pipeline gas will increase every year.

At the same time, the gas prices will no longer depend on oil prices because they will be determined on independent trading platforms. "This is already noticeable. For example, for six years, Russian Gazprom has been selling gas at prices fixed on European trading platforms. All gas contracts have clauses that consider these points. Therefore, contracts with fixed long-term prices will become irrelevant, since prices in the market will also change," V. Drebentsov said.

However, given the relative "environmental friendliness" of natural gas, the growth in gas demand in the global energy sector will grow until 2040. Therefore, countries rich with natural gas will not become losers. Active support by governments and financial institutions to global projects for the production and transportation of natural gas shows the growing interest in this type of fuel. Azerbaijan is one of the countries eagerly waiting for access to the world market with its natural gas, which will eventually support the country's economic stability for many years.